If you are thinking of taking out a mortgage or a loan you may be wondering whether there is any protection or regulations to fall back on if things go wrong. It’s fairly well known that there is a lot of consumer protection available if you have received bad or unsuitable advice concerning your main residential mortgage.
Bridging loans are not as well known but are still a type of mortgage. They are a very flexible form of borrowing and are typically used where money is needed quickly.
But will you be protected if you take out a bridging loan? In this article we will cover what a bridging loan is and then explain how the regulation of these loans works in the UK.
What is a bridging loan?
Bridging loans are a form of short-term borrowing which will always be secured against a property (or land), much like a mortgage.
The loans can be granted for almost any purpose and will normally be set up on an interest-only basis. There’s no need for any monthly repayments, the interest and charges are ‘rolled up’ and added to the capital amount borrowed.
These loans are available only for a short period, usually from 3 to 36 months. At the end of the term you will need to repay the whole debt in one go.
They are not offered by the high street lenders but by specialist lenders and banks. These lenders are happy to take some additional risk when providing bridging loans and their reward is in the form of higher interest rates.
Although they are much more expensive than a standard mortgage their USPs are hard to beat:
- Loans available up to 75% LTV
- Will lend on any property
- Including uninhabitable properties!
- There’s no need to prove your income
- Secure loans against multiple properties
- Some bad credit is OK
- Capital raise for any purpose
- They can be arranged quickly
Bridging finance is a temporary loan facility and is much quicker to arrange than a residential mortgage for your home. The lender will look at the property and how you intend to repay their loan (the exit strategy). If it all looks good then you can have the money in just a few weeks.
What are some common exit strategies for bridging loans?
Can you get a bridging loan with bad credit?
What is the FCA?
FCA is an abbreviation of Financial Conduct Authority. They provide the regulation for mortgages and mortgage brokers in the UK.
Here’s what Wikipedia has to say:
The Financial Conduct Authority (FCA) is a financial regulatory body in the United Kingdom, but operates independently of the UK Government, and is financed by charging fees to members of the financial services industry. The FCA regulates financial firms providing services to consumers and maintains the integrity of the financial markets in the United Kingdom.
The authority has significant powers, including the power to regulate conduct related to the marketing of financial products. It is able to specify minimum standards and to place requirements on products. It has the power to investigate organisations and individuals. In addition, the FCA is able to ban financial products for up to a year while considering an indefinite ban; it has the power to instruct firms to immediately retract or modify promotions which it finds to be misleading and to publish such decisions.
Wikipedia
They will provide the rules and regulatory framework for lenders that provide bridging loans and brokers that arrange bridging loans. The phrase “authorised and regulated by the Financial Conduct Authority” will be displayed by businesses that fall under these regulations.
Where consumers feel that they have not received good advice, and have suffered financially, they have the right to use the Financial Ombudsman Service (FOS).
The Financial Ombudsman Service is a free and easy-to-use service that settles complaints between consumers and businesses that provide financial services. We resolve disputes fairly and impartially, and have the power to put things right.
www.financial-ombudsman.org.uk
So what is a regulated bridging loan?
For a mortgage or loan to be regulated (by the FCA) it has to be associated with your home or main residence.
Not all bridging lenders will offer regulated loans, so it’s good to get the position established early on. The rules are in place to protect personal borrowers and will not apply to investors, landlords or companies.
So if the bridge loan is for a commercial property it is unregulated, and the same would apply to the commercial property mortgage that may provide the exit.
If the bridge loan is for a holiday let/second home it is unregulated.
And if it is for a buy to let property that is occupied by tenants that do not form part of your family then it is unregulated.
A bridging loan will be regulated if:
- It is secured against a property that is, or will be, the borrowers main residence. In addition this will apply to members of their immediate family which can sometimes impact on a buy to let property.
- 40% of the property is occupied by the borrower or close relative.
Once a loan is deemed as regulated it will share the same regulations as residential mortgages.
The loan can be set up as either a first charge or second charge but the use of the property will determine the regulations that apply.
The main aim is to provide protection where the borrowers primary residence could be placed at risk of repossession if the loan is not repaid as agreed.
What are the differences between regulated and unregulated?
The primary difference will be the layer of protection provided by the FCA for regulated mortgages.
Regulated loans will require additional mortgage underwriting, with proof of income and affordability checks. Consequently they tend to take a little longer to arrange when compared to an unregulated contract.
Regulated loans will have a maximum term of 12 months, compared to 36 months for unregulated.
How do I know which type of loan I need?
The type of loan needed will depend on the property involved and who will be living in it. Your mortgage broker will be able to assess very quickly whether the loan is to be regulated or unregulated.
You can’t ‘choose’ to have a regulated loan, the borrowing circumstances will dictate how it is to be classified.
Remember that the regulations will apply to both your mortgage broker and the bridging lender.
The process of applying for a regulated bridging loan
Your broker will issue you with a terms of business letter and after conducting their research, a mortgage illustration for the recommended scheme.
Once you have accepted a bridging loan to proceed with, the loan recommended and the reasons why the adviser selected it will be confirmed to you in writing.
